Fixed Income Strategy Portfolio

The LOM Approach to Fixed Income Portfolio Management

Overview

LOM Asset Management offers a wide array of fixed income products designed to meet specific client investment objectives. These products span the yield curve and incorporate the expertise of various sector and sub-sector specialists. Each client’s guidelines are tailored to reflect their particular investment needs with respect to currency, interest rate exposure, sector allocation and credit quality.

LOM Asset Management applies a controlled duration, active sector rotation style to all fixed income products. Our disciplined investment process seeks to add value through: (i) controlling portfolio duration within a narrow band relative to a benchmark index, (ii) relative value sector/sub-sector rotation and security selection, (iii) rigorous quantitative analysis of the valuation of each security and the portfolio as a whole, (iv) intense credit analysis and review, and (v) the judgment of experienced portfolio managers.

Portfolio managers work as a team to implement investment themes within the parameters of each client mandate.

Our analysts have developed relationships with the world’s top investment banks and dealers to assist in identifying relative value and to keep abreast of the ever-changing global economy.

Dedicated to our clients needs

At LOM Asset Management we are dedicated to meeting the needs of our clients, an objective that is characterized by:

The specialized skills and proven experience of our investment professionals

Our constant striving for superior performance and our desire and ability to satisfy the specific requirements and objectives of our clients

These are the major reasons why clients select LOM Asset Management as their fixed income investment manager.

Investment Process

Our Investment Process Delivers Attractive Risk Controlled Returns

Our investment process generates superior returns through incremental income, protection of principal and capital appreciation, while controlling the risk elements of the fixed income markets.

Sector Rotation The Portfolio is managed with a “sector rotation” style. Our managers look at the market in terms of individual sectors, i.e. governments, corporates, asset-backed securities, mortgage securities, etc. Relative valuation between sectors is an important consideration. We will invest in those sectors that offer good absolute and relative value with consideration given to the sector’s performance outlook and its historical spread to Treasuries. Sectors which LOM believes are undervalued will generally be overweighted in the Portfolio and subsequently sold as they become fully valued.

Active Duration Management Duration management is based on forecasts of probable trends in interest rates and is performed on a continual basis. These forecasts are supported by detailed analysis of important economic factors and lead to adjustments in the average maturity of our bond portfolios. At the same time, the changing shape of the yield curve is evaluated to determine the spacing of our maturities.

Volatility Management Volatility management allows us to assess both portfolio and individual security risk given current and potential market movement. Volatility is a comprehensive measure of portfolio risk that captures sector, security, duration, yield curve and other non-traditional sources of risk. This analysis is accomplished through the use of interest rate simulation, sector and security sensitivity analysis, and portfolio modeling which allows us to analyze the effect of interest rate changes on our portfolio.

Yield Inefficiencies Individual security selection is bottom-up and based upon analysis of each individual investment. As value investors, we seek to identify securities that are inefficiently priced and/or misunderstood. Our focus is on the spread between a specific security, a comparable duration Treasury and peer group issues. Our internal research team is responsible for specific security recommendations.

Strategies

Money Market

Our Money Market strategy is designed to provide current income with minimal capital risk. Our portfolio managers believe that through price-sensitive trading, prudent maturity management and independent research focusing on market inefficiencies, we can deliver consistently superior performance. Our products range from the AAAm rated US$ LOM Money Market Fund (also available in CA$ and €uro) to discretionary client portfolios. This strategy is characterized by a maximum average portfolio maturity of two months. The minimum security quality is A, with all money market instruments rated A-1, P-1 or F1. A typical benchmark is the one month Treasury Bill or the Standard and Poor’s Micropal Money Market Fund Average.

Enhanced Cash

Enhanced Cash is an ideal strategy for clients with moderate but sizeable or predictable cash flows. These clients emphasize positive quarterly returns with minimal exposure to monthly price volatility, and have the investment objective of outperforming traditional cash management strategies over a one to two year time period. This strategy is characterized by a maximum average portfolio maturity of one year. The minimum security quality is BBB, with all money market instruments rated A-1, P-1 or F1. Minimum average portfolio quality is A. We invest in the full range of fixed income sectors appropriate for this strategy risk level. A typical benchmark is the six-month Treasury Bill.

Short Duration

The Short Duration Strategy offers the potential of slightly higher returns with low risk levels, and is ideal for clients who believe there may be a future call on a significant portion of their assets. These clients emphasize positive quarterly returns and have an objective of outperforming, over a market cycle, a one-year security. This is a particularly attractive area of the yield curve that has historically offered consistent annual total rate of return, and no annual period of negative benchmark returns.

The strategy is characterized by a maximum average portfolio maturity of up to three years. Minimum security quality is BBB, with all money markets A-1, P-1 or F1. Minimum average portfolio quality is A. We invest in the full range of fixed income sectors appropriate for this risk level. A typical benchmark is the Citigroup 1-3 year Treasury Index.

Intermediate Duration

Our Intermediate Duration Strategy, managed to durations of three to seven years, offers exposure to broad bond market returns with reduced risk. Intermediate duration accounts are positioned far enough along the yield curve to deliver much of the market’s yield, and over a market cycle a large majority of the return of the bond market. Intermediate accounts can fully participate in the broadest array of sector and security opportunities while receiving superior principal protection from a moderate duration. Thus, this strategy is ideal for clients who seek to participate in broad bond market movements but have a lower risk tolerance. This strategy will have an average credit quality of A or better and a typical benchmark is the Citigroup 3-7 year Treasury Index.

Long Duration

Our Long Duration Strategy invests in a widely-diversified group of long-term bonds, most of them issued by corporations with strong credit ratings. It may also invest in U.S. Treasury securities and mortgage-backed securities. To achieve a high degree of stability in interest income, the portfolios will maintain an average maturity of between 15 and 25 years. Within that range, the average maturity may be adjusted to take advantage of expected changes in interest rates.

The strategy also seeks to improve returns or its income stream by emphasizing individual securities and sectors of the bond market that represent good value based upon historical yield relationships. A typical benchmark is the Citigroup 10+ year Treasury Index.

Global Strategy

Our Global Fixed Income Strategy is directed at clients who desire to participate in the broad global movement of fixed income markets and are prepared to accept the volatility of diversified global fixed income securities and currency movements.

We are value-oriented investors and our strategy seeks to capture the best relative values among global markets and manage currency exposure to capture incremental return as well as control overall portfolio risk. We invest across the full range of developed markets and, while governed by client guidelines, may opportunistically invest in emerging market securities that meet our strict investment criteria.

The final portfolio will incorporate the investment opportunities presented by our geographic and currency management. We ensure that portfolios are well diversified by geography. We seek to invest in market sectors — such as mortgages or corporates — that offer incremental yield. We manage duration at both the country and portfolio level, to maintain an appropriate risk profile. Finally, we establish hedging tactics. Thus our portfolio will combine investment opportunities with carefully measured risk control.

Global portfolios are managed to exceed the return of global indices such as the JP Morgan Global Bond Index and/or the JP Morgan Non-US Global Indices. Our strategies can invest in the US, however, our Global portfolio structure will take into account the weighting of the US market in global indices.

The average credit quality of our global fixed income portfolios is very high, averaging AAA, though it can range as low as A depending on client risk tolerance.